Eleventh Circuit Court of Appeal Adopts High Standard for Pleading Securities Fraud
 
September 6, 1999
 

The Private Securities Litigation Reform Act of 1995 (PSLRA) imposed heightened pleading requirements for securities fraud class action suits alleging the violation of section 10(b) of the Securities Exchange Act of 1934, or SEC Rule 10b-5. The PSLRA requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." In the case of section 10(b) and Rule 10b-5, the required state of mind is known as scienter, which means a mental state embracing the intent to deceive, manipulate or defraud.

The heightened pleading requirements imposed by the PSLRA are intended to protect public companies, and their directors and officers from frivolous lawsuits. Vague and general allegations of wrongdoing are no longer sufficient. Where plaintiffs fail to allege facts giving rise to the strong inference of scienter, their action must be dismissed; however, the federal courts are divided as to what exactly plaintiffs must allege in order to meet the requirements.

In a recent opinion, Bryant v. Avado Brands, Inc., 1999 WL 688050 (11th Cir. September 3, 1999), the Eleventh Circuit Court of Appeals, which has jurisdiction over Florida, Georgia and Alabama, held that a securities fraud plaintiff must plead scienter by alleging particular facts giving rise to a strong inference that the defendant acted in a severely reckless manner. Further, the court held that allegations that a defendant had the motive and the opportunity to commit the alleged fraud are not sufficient.

The Bryant decision is a positive development for public companies, directors and officers defending securities fraud class actions in Florida. Only the Ninth Circuit Court of Appeals, which includes California, Oregon and Washington, makes it tougher for shareholders to stay in court. In the Ninth Circuit, plaintiffs must allege facts giving rise to a strong inference of deliberate recklessness. See e.g. In re Silicone Graphics Inc., Securities Litigation, 1999 WL 595194 (9th Cir. August 4, 1999). In contrast, the Second and Third Circuit Courts of Appeal, which include New York, New Jersey and Pennsylvania, are more friendly to plaintiffs. In those circuits, allegations that a defendant had the motive and opportunity to defraud are sufficient. See e.g. Press v. Chemical Inv. Serv. Corp., 166 F. 3d 529 (2d Cir. 1999) and In re Advanta Corp. Sec. Litig., 180 F. 3d 525 (3d Cir. 1999).